Flash Crashes Jolt Ethereum, Cryptocurrency Markets

After a period of seemingly ever-increasing prices in the digital currency markets, the upward trend has been disrupted by a series of “flash crashes.”
Bitcoin and primary rival currency Ethereum, enjoyed a precipitous rally through the first few months of the year. Bitcoin tripled in value, topping out at nearly $3,000, while Ethereum shot up well over 4000 percent of its original $8 value to around $400, according to numbers on coinbase.com. This enormous jump in prices was due in no small part to the rise in Initial Coin Offerings (ICO’s), which are essentially a form of venture capital in the cryptocurrency world.

These, along with legitimizing factors such as Japan authorizing bitcoin as a method of payment, caused less niche investors to investigate the market themselves. As more people poured their capital into bitcoin, Ethereum, and other, similar cryptocurrencies, prices continued to rise at an astounding clip, even by cryptocurrency standards. This run-up came to a head on Wednesday, when, for Ethereum, a massive, “multimillion dollar sell order” was placed and automatic mechanisms designed to prevent excessive loss, triggered a wave of liquidation that drove its price down rapidly.

Traffic on the major digital currency exchanges was so heavy at this point that some crashed or froze trading, not the first time this has happened in the wake of a buying or selling frenzy. When all was said and done, Ethereum had momentarily traded at just 10 cents from over $300 on GDAX, one of the larger exchanges. While it has somewhat rebounded and sitting around $230, cryptocurrency markets, in general, suffered some substantial losses, though they are still up for the year.

While some may view traditional markets as volatile, cryptocurrency markets are to a much greater extent. All trades are completely final and non-reversible even in extreme circumstances such as flash crashes. In contrast, when the Dow Jones fell around 1,000 points in 2010, the SEC reversed many of the trades in an attempt to reintroduce some stability into the market. These reversals do not happen in cryptocurrency markets. According to Paul Vigna of The Wall Street Journal, the exchanges operate in this way to protect their integrity, likely due in part to competing exchanges and cryptocurrencies. These 24-hour, seven days a week digital exchanges do not feature conventional mechanics like opening and closing bells, to limit trading hours, or circuit breakers, which are designed to suspend or even shut down trading for pre-determined amounts of time if crashes occur. In short, the world of cryptocurrency is still a work in progress, but this doesn’t mean that the flash crashes and latest dips are signaling the cataclysmic end of bitcoin, Ethereum, and altcoins as we know it.

For the most part, it appears that many knew this eventual selloff would occur. Prices have stabilized and, for bitcoin and Ethereum, are still up overall for the month of June.

It is undoubtedly riskier to invest in the cryptocurrency market, but, as more companies like Intel, Microsoft, and JP Morgan continue to test out and incorporate much of the software behind cryptocurrencies and Ethereum in particular, the rebounding capability of said market is hardly surprising. Consumers in particular are likely to see more blockchain-based applications and services in the form of record keeping, payment methods, or even software for self-driving cars. Concerns of a speculative bubble continue to exist due to the year-to-date appreciation of just about all the major cryptocurrencies, but, as many of our previous articles have pointed out, only time will tell.

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